The 5 Most Common Misconceptions I Hear About Bitcoin and Crypto

Whenever I tell people I cover crypto as a journalist, they like to ask questions or make comments, but often, the phrasing they use reveals a lack of understanding about blockchain technology.

If you're still a newbie to "the space," as crypto people call it, here are the five most common misconceptions I hear about it, so you can not only understand it at a deeper level, but also help any friends who are interested too.

The name cryptocurrency was born with bitcoin, the first crypto, whose white paper is titled, "A Peer-to-Peer Electronic Cash System." Since that initial vision for bitcoin was that it was electronic cash, it fit, broadly, into the category of currencies, which are mediums of exchange, units of account, and stores of value. However, even bitcoin's usage has changed such that it doesn't function much like a currency in many parts of the world. In fact, the Commodity Futures Exchange Commission, the main regulator for bitcoin in the US, classifies it as a commodity.

Similarly, the broader world of crypto contains many other types of assets, which is why it makes more sense to broadly call the category cryptoassets, not cryptocurrencies. A popular book by Placeholder Capital partner Chris Burniske and investor Jack Tatar which is a primer on the whole space, is titled "Cryptoassets." Some cryptocurrencies do, and are meant to, function as currencies. Others are more like commodities, such as bitcoin, as well as ether, which is a type of "gas" (like oil) needed to run computation on Ethereum. Others are likely securities, which is what SEC chair Gary Gensler has said. So, even though the original term most people are familiar with is cryptocurrency, and that's become a catch-all word for this sector, the more accurate terminology is "cryptoassets."

Crypto networks are truly something new in history, which means we often lack the language for what they are, or that people sometimes rely on existing words that are inaccurate. Maybe because of the internet revolution that began a couple decades ago, many people continue to believe Bitcoin, Ethereum and other crypto networks are like companies. I've heard people refer to them as startups or organizations or companies, when in fact, they are decentralized networks.

That means that a random and shifting group of actors has helped bring them into existence. This is especially true with Bitcoin, whose creator(s) ended up abandoning Bitcoin after a few years, handing off management to a trusted lieutenant. However, as time has gone on, it's become clear there's no identifiable entity in charge, and management of the protocol largely happens by consensus amongst the users, developers and miners.

Ethereum, which is guided by the Ethereum Foundation, a Swiss non-profit, has many other private companies and individual developers who contribute to the ecosystem. Every year, Electric Capital puts out a report on developer activity in crypto, and Ethereum has far and away the most developers working in it -- 2,400 as of the 2020 report (vs. about 350 for Bitcoin). And no, most of these are not hired and paid by the Ethereum Foundation.

Many other crypto networks are either decentralized or are aiming to become so, especially since we've seen the SEC go after centralized entities such as startups and companies that either issue or make plans to issue their own crypto tokens without registering with the SEC. (See Telegram, Kik, Ripple.)

Since the dominant model we have for investments that aren't funds is stocks, people have said to me something about buying "stock in bitcoin" or "bitcoin stock." But a stock is a share in a company, in a centralized entity, and as already described, the token for a truly decentralized crypto network is not the same as part ownership of a company, which would have an identifiable board, C-suite, management, and a business entity.

Although there are centralized entities that build decentralized crypto networks, the cap table for those private companies, were they ever to go public, would produce stock in those firms. That is not the same as tokens in decentralized protocols, which are often built so that, once they are live on the network, the company cannot singlehandedly make upgrades to it. In that case, oftentimes, the developers will design the token to be what's called a "governance token," as part of a voting system in which the community uses their tokens to decide on upgrades to the protocol.

(In the US, because many of the companies that develop these protocols start out having more centralized control and then decentralizing over time, there is a risk they run afoul of securities laws, and it does seem the SEC is cracking down, so we'll see if, in the future, it remains possible for them to execute this gradual strategy of decentralization that many of them have used so far.)

People are always framing investment questions about crypto as whether they should invest in that vs the stock market, or which crypto they should buy. And certainly, yes, many people have bought crypto and simply passively owned it as an investment. But most crypto tokens are meant to be used. (At least the ones that aren't thinly disguised securities that are actually just shares in a centralized company that hasn't registered with the SEC -- what SEC commissioner Hester Peirce calls "decentralized in name only," or DINO.)

While bitcoin's monetary policy, which features a 21 million supply cap, gives it characteristics like gold (hence the nickname digital gold), bitcoin can also be used for payment. As mentioned earlier, the white paper was subtitled, "A Peer-to-Peer Electronic Cash System."

Same with ether. Yes, you can just buy ether and hold it passively, but also, you can use ether to pay for computation on the Ethereum network -- to pay for the "gas" that enables you to interact with smart contracts and, for instance, participate in DeFi (decentralized finance), or buy, sell or make your own NFTs.

There are decentralized storage networks with their own token, and you could connect your spare disk storage to them to earn that token. Or, if you would like to use the decentralized storage service, you can buy that token in order to pay for storage on that network.

As this technology developers further and becomes more user-friendly, I believe many more people will buy various crypto assets in order to actually use them, not just to passively invest.

Even JPMorgan CEO Jamie Dimon made this mistake back in 2017, when he said of bitcoin, "eventually it will be closed." The only way to shut down any of these decentralized crypto assets would be to shut down the internet. Since Bitcoin is decentralized, even if every government in the world coordinated tomorrow to shut down every single Bitcoin miner and node, there would be nothing to stop other random people from spinning up their own nodes or running the Bitcoin software even on their computers, as happened in the early days, before specialized chips were developed to mine bitcoin.

It's the same with Ethereum or any of these other decentralized crypto assets. (Centralized ones are a different story, which is how the SEC has been able to bring enforcement actions in the crypto space.) Even if the Ethereum Foundation went away, there's an extremely large community of Ethereum developers who would probably continue the functions that the foundation currently manages, and there is no stopping anyone from spinning up a new miner that runs the Ethereum software even if all the current miners globally were shut down.

As you can see, one of the main features that distinguishes crypto from what came before it is that decentralized aspect. It may take a while to wrap your head around that, but once you understand it, it's hard not to recognize it as something truly new in history. If you want deepen your understanding of crypto, check out my previous post on the 10 terms in crypto you need to know, which further explains these concepts.

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